E&P Determination
adjustments, cont.

Decreases to E&P Amount

Excess LTCL
2,500

Estimated federal taxes
paid 800

Total decreases
(3,300)

Earnings and profits total 13,450

(8,450 + 8,300 less 3,300)

Cash Distributions
p.169 Income Tax Effects

1) Cash distribution to the shareholder
is a “dividend,” but the dividend amount is limited to the distributing
corporation's “earnings and profits” amount. Code §301.

2) Result to the corporation:
Reduction of E&P by the amount of the distribution, limited to the amount
of E&P (i.e., cannot create a negative amount in E&P account).

3) What allocation procedures (next
slide)?

Allocation Procedures
Rev. Rul. 74-164 p.170

1) Current
e&p is allocated proportionately to all current year
distributions.

2) Accumulated
e&p is allocated chronologically to distributions during the year
(starting with the first distribution).

3) Currentloss
is allocated pro rata against accumulated e&p available on the
date of the distribution, unless the date of the loss is specifically
earmarked.

Problem
(a) p.173
Distribution Exceeding E&P

$10,000 tax basis to Ann for
Pelican stock.

Pelican has $5,000 of current
e&p and no accumulated e&p and distributes $17,500.

Result: a) $5,000 dividend -
§301(c)(1)

b) $10,000
return of capital - §301(c)(2); zero basis for the
stock.

c) $2,500
capital gain - §301(c)(3).

Pelican's e&p is reduced to
zero - §312(a)(1).

Problem
(b) p.173
“Nimble Dividend” Rule Effect

$15,000 accumulated deficit
in e&p from prior year and $10,000 of current e&p & corp.
distributes $10,000 currently.

Result: the entire
$10,000 distribution is a dividend to Ann under the "nimble
dividend" rule (sourced from current e&p).

Pelican continues to have a
$15,000 deficit in its e&p (i.e., no adjustments to e&p account).

No current e&p (after the
distribution).

Problem (c) Distributions
& Mid-Year Stock Partial Sale

Facts: (i) $10,000 of
accumulated e&p before year two (to be allocated chronologically) and (ii)
$4,000 of current e&p (pro-rated).

1) April 1 distribution
of $10,000.

2,000 (pro rata portion of
4,000 current E&P); & then 8,000 of 10,000 accumulated E&P
received as a dividend distribution.

continued

Problem (c) continued
p. 173

2) October 1
distributions of $5,000 & $5,000 to (now) two shareholders.

$2,000 current E&P
(1,000 each shareholder). $2,000 remaining accumulated E&P (10,000
less 8,000) allocated 1/2 (1,000) to each shareholder. Each has $3,000 capital
return. 3) On July 1 shareholder sells 1/2 of stock for 15k
(impact on/of the October transaction?)

Problem (d), cont., p.173
Option Two (dividends 1st)

Less: distrib. 5,0005,000

Result: 2,500
1,250 (basis)
(gain)

3) July 1 sale of 1/2
stock for 15k: 11,250 gain or 13,750 gain (15x less 1/2 of 2,500 or
1,250).

Distributions of Property to
Shareholders p.173

Income tax issues upon property
distribution:

1) Income (loss?)
recognition to distributing corporation upon a distribution in kind?

2) Effect on E&P
from the distribution event and the gain recognition to the corporation?

3) Dividend treatment to
the shareholder receiving the property as distribution (fmv)?

4) Tax basis to the
shareholder for the property received in the distribution?

Problem
(a) p.177
Appreciated Inventory

Zane purchased Sturdley stock
for $8,000.

Sturdley has $25,000
accumulated e&p and no current e&p. Distribution of inventory
made:

$20,000 FMV and $11,000
basis.

1) Sturdley has recognized gain
of $9,000.

2) $9,000 gain = current
e&p for Sturdley.

3) The entire $20,000 is
dividend to Zane.

9,000 current e&p and
11,000 of acc. e&p. cont.

Problem (a), continued
p.178

4) Basis to Zane for the
inventory received:

$20,000 (FMV) -
§301(d). Holding period?

5) Remaining E&P is
$14,000:

25,000 prior
E&P, plus 9,000 current E&P, less 20,000 distribution, equals 14,000.
§312(b)(2). Not considering the impact of the federal income tax liability on
the $9,000 gain realized on asset distribution.

Problem
(b) p.178
No Pre-Distribution E&P

Sturdley has no accumulated
e&p and no current e&p. Distribution of inventory:

$20,000 FMV and $11,000
basis.

1) Distribution produces to the
corporation

$9,000 gain (ord. income) &
$9,000 current e&p (less any income tax on the $9,000 gain).

Strap basis of $150,000 in X
stock.

X will distribute $100,000 to
Strap.

Strap will sell X stock to Boot
for $400,000.

continued

Problem, p. 207

Strap would receive a 100% DRD
- if the form of the transaction is respected.

Strap’s LTCG would then be
$250,000 (400 less 150 tax basis).

Here: the unwanted asset is
fungible cash - and is the distribution part of the sale?

Stronger step transaction
argument for IRS?

Dividend excluded if a
consolidated return.

continued

Problem p.207, cont.

If Strap is an individual:
IRS would argue for dividend treatment since the $100,000 dividend
would be treated as ordinary income (subject to tax at ordinary income tax
rate, rather than the 15% rate for capital gains); but compare impact after
2003 Act?

Planning in this context: have
the individual redeem $100,000 worth of stock immediately before the
sale to Boot?